August 28, 2009 / 10:55 PM / 10 years ago

ANALYSIS - Apple's China iPhone deal a good start

NEW YORK (Reuters) - Apple Inc’s deal to sell the iPhone in China is seen as just the beginning of its dealmaking in the world’s largest mobile phone market.

A customer looks at the Apple iPhone 3GS featuring the Word Fu application at the company's retail store in San Francisco, California June 19, 2009. REUTERS/Robert Galbraith/Files

The three-year deal with China Unicom, the country’s second-largest carrier with more than 14O million customers, is not exclusive, in sharp contrast to its U.S. arrangement with AT&T Inc.

Exclusivity would have severely hurt Apple’s chances of growing much beyond Unicom’s customer base.

As it is, Apple is free to pursue deals with China Mobile, which has 500 million subscribers, and China Telecom, with another 42 million subscribers.

Those numbers are staggering, even for a company of Apple’s size. China’s 700 million mobile subscribers are more than that of the United States and Europe’s combined.

“You always worry whether the growth rates in Apple’s profits will slow or if they can sustain themselves,” said Adam Harter, an analyst at Financial Enhancement Group, which owns Apple shares. “But opening a new market is a great positive to keep that growth rate going.”

Susquehanna Financial Group, whose parent makes a market in Apple shares, estimates Apple could get roughly 3 percent of China’s market, which would equate to an extra 2 million iPhones sold over the next year.

What is more, Susquehanna analysts said every 1 million extra iPhones sold is equal to 18 cents to 20 cents of earnings per share. Apple is expected to earn $5.85 a share for its 2009 fiscal year, according to Reuters Estimates.

Other analysts are even more bullish on Apple in China.

“We estimate they can have roughly 10 percent share in calendar year 2010 so our total iPhone estimates for calendar year 2010 for Apple are 37 million units,” said Brian Marshall, analyst at Broadpoint AmTech.

“I think roughly 15 to 20 percent of the numbers next year are going to come directly from China, so this is a huge deal,” Marshall added.

OBVIOUS FIT

For Apple’s first deal, China Unicom was the obvious fit since it works with the same WCDMA technology the iPhone now supports. But the prospect of tapping into the rest of the Chinese market could make it worthwhile for Apple to develop iPhones using other wireless technology, analysts said.

Apple declined to comment on whether it is in talks with other Chinese carriers or developing new handsets.

Neither Apple nor Unicom would provide pricing details for the phone. Analysts, however, said it will likely cost more than the $200 that AT&T customers pay in the United States.

The reason is that Unicom traditionally earns less revenue from each customer than AT&T, meaning it would likely want to make up for that by charging more for the phone itself. Some analysts figured it could be priced as high as $400.

But that hardly seems a roadblock when unlocked iPhones — which work with any carrier — can go for $500 on the black market in big Chinese cities.

Apple shares, having doubled this year, have largely priced in a China iPhone deal, long the subject of speculation. They rose less than 1 percent to $170.05 on the Nasdaq on Friday.

Still, Susquehanna analyst Jeffrey Fidacaro said investors might be underestimating how well Apple could do in China.

“We may still be surprised by the penetration rates Apple is able to achieve, there could still be upside here.”

Additional reporting by Clare Baldwin in San Francisco

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